Are Bank Loans Your Best Option for Personal Loans?
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Personal loans are a flexible financial tool. You can use them to consolidate debt, pay for a trip to the Hawaiian Islands or cover an unexpected medical cost.
Whatever your reason for a personal loan, it’s easy to assume that a traditional bank is the best place to go for a loan. But credit unions and online banks are fierce competitors vying for your business — and they may be a more viable option for a loan.
Here’s what you should consider as you decide whether or not a traditional bank is your best choice for a personal loan.
Choosing between a traditional bank, online bank and credit union
On the surface, it might seem like financial institutions aren’t all that different from one another. Each may allow you to deposit paychecks, save money, borrow for purchases or pursue other financial goals. But you’re liable to find some key differences that affect which one you choose for a personal loan.
A traditional bank is a for-profit financial institution with branches you can walk into. It’s still possible to speak face-to-face with a representative, who can help accept deposits and review loan applications for borrowers. These banks often offer a suite of financial products, from checking and savings accounts to personal loans.
Interest collected from borrowers helps make money for the bank and its stockholders. To thrive in the financial industry, a bank needs to make profits from member activity; those profits are paid in dividends to shareholders. For 2018 personal loans, the average APR for borrowers was 33.52%, although rates can reach the triple digits for those with bad credit scores.
As a result of the costs associated with maintaining physical branches and keeping stockholders happy, banks face increased financial pressure; this pressure may negatively affect your loan’s total costs, including interest and fees. “The traditional banks typically don’t have much room to wiggle,” said Mitchell Hockenbury, a certified financial planner with 1440 Financial Planners in Kansas City, Moi.
- You can apply for a loan and discuss terms in person.
- If you’re already a customer of the bank, you may find it easier to apply at the same bank where you’re already using direct deposit for paychecks.
- A traditional bank may offer smartphone apps and other useful Internet tools for loan repayment and maintenance, thereby offering some benefits of an online-only bank, such as ease and 24/7 account access.
- Banks often have high requirements regarding minimum credit scores to qualify for a loan. Many banks acquire significant income from fees and interest, including personal loan origination and servicing fees. You may find interest and fees are higher at traditional banks than at other financial institutions as they have higher overhead costs.
- A physical bank may offer limited hours for the application and repayment process – closed after your workday, or on weekends.
Is a traditional bank’s personal loan right for you? You may feel more at ease with the face-to-face access and physical building a traditional bank can provide. It may also be one of your only options if you don’t qualify for a credit union membership or feel anxious about online banking with an internet-only bank without physical offices nearby.
An online bank (also called an internet-only bank or e-bank) doesn’t have physical offices that you can visit to deposit paychecks, make loan payments or discuss other financial matters. Instead, you can often do the above via the Internet, using your computer browser or a smartphone app. Applying for a loan may take just a few clicks, depending on the complexity of the loan.
As with other banks, you often need to open an account and pass a credit check to qualify for a personal loan, and your interest rate will vary depending upon your credit score. While an online bank is also for-profit and needs to make money, you may find lower fees, as online banks don’t need to pay for upkeep and maintenance of buildings.
“Typically with their low overhead, an online bank is well positioned to offer you lower rates,” Hockenbury said. “Additionally, an online bank is usually set up to give you quick loan decisions and servicing. They are digital, after all.”
When applying for a loan, ensure you haven’t confused an online bank with an online payday loan company, which the Federal Trade Commission (FTC) warns may misrepresent the finance fees required, sell your personal data or charge excessive interest rates.
- Online banks are easy to access and use, as long as you’re comfortable with the Internet. You can apply for a personal loan while sitting in your living room armchair.
- Some online banks offer products to those with poor or bad credit and may help you avoid a payday lender.
- E-banks may offer lower rates due to lower overhead.
- The level and quality of customer service (often offered by chat, email and phone) can vary; online reviews may help you discern current borrowers’ happiness with the online bank.
- You may have to give up some personal service found at your bank or credit union, Hockenbury said.
- If you’re unfamiliar with online banks, you’ll need to do extra research to ensure you’re comparing rates from reputable lenders.
Is an online bank’s personal loan right for you? A personal loan from an online bank may be a good option if you prefer the ease of getting a personal loan online, have credit complications, or you find that the interest rate, fees and total repayment are much lower than at a traditional bank.
Credit unions are nonprofit organizations serving their members’ financial needs; profits return to the credit union, not shareholders. As a result, they can often provide affordable rates and flexible terms.
“Where a traditional bank may be quick to say ‘no’ to a loan, a credit union may be willing to sit down with you and discuss options,” Hockenbury said. “A credit union manager usually has a bit more flexibility to work with you, and looks at you as a member. Credit unions are better aligned with you, and willing to work out a loan, whereas the traditional or national bank may have to toe the company line,” he said, where interest, terms and fees are concerned.
However, qualifying as a member is probably a prerequisite for taking out a loan. Typically, qualifying as a member of a credit union may take a little bit of work. Some credit unions accept members based on location, such as residence in a particular county or state. Others require you or a family member to attend a particular university, work at a particular business or serve in an arm of the military. However, some credit unions have more lenient rules about membership.
- Even with a poor credit score, credit unions may be more likely to take a chance on giving you a personal loan, according to Experian, the credit reporting agency.
- Credit unions typically offer unsecured fixed-rate loans at lower interest rates than banks.
- Personal loans may only be offered to members, and you may not qualify for membership.
- Credit unions rarely offer as many locations as a bank for personal loan application and account maintenance. However, most credit unions are linked through a network of ATMs, allowing members to make deposits or withdrawals far from the credit union’s physical location.
- Some credit unions may not have the robust online presence of an online bank, but much depends upon the institution.
Is a credit union’s personal loan right for you? If you can qualify for membership, a personal loan from a credit union may be more aligned with your financial goals, including paying lower interest rates and lower fees, and repaying your debt faster.
Moving forward with a lender
Choosing a lender takes careful consideration. Start by deciding whether you’re comfortable with a traditional bank, credit union or online lender — or any combination of the three.
Once you decide which type of lender you’d like to work with, you can begin researching your options. You may ask lenders about such things as:
- Qualification requirements for a personal loan
- Term lengths and the APRs offered to borrowers
- How much you will pay in full, including fees, interest and the original loan amount
- Late payment penalties and lender actions if you can’t repay the loan
After picking a few of your favorite lenders, you can apply for a preapproval. The process often only requires a soft credit check, which won’t affect your credit score. With a preapproval, you can see the types of rates and terms you may qualify for. That could help you narrow down your choices on the best lender for you.